FOREX-Euro volatile, vulnerable to Greek elections

* Euro swings in choppy trade, offers cited above $1.2530
* Near-term implied volatility jumps ahead of Greek election
* Concerns about Italy borrowing costs emerge
By Anirban Nag
LONDON, June 12 The euro was choppy on Tuesday,
with many investors selling the common currency at higher levels
as concerns over Spain's bank bailout deal lingered and most
gearing up for more uncertainty after Greek elections this
Sunday.
Traders said buying by Middle East investors lifted the euro
above $1.2520, before it fell below $1.25 during the
European session. It was last trading at $1.2505, up 0.2 percent
with offers from real money investors cited between $1.2530-40.
This was likely to limit gains by the euro.
The euro has retreated from a near three-week high of
$1.2672 as the initial euphoria from Spain's 100 billion euro
bank rescue fizzled, with investors concerned bailout-related
payments could rank ahead of regular government debt in the
queue for repayment.
Analysts said market players would be reluctant to initiate
fresh positions ahead of the Greek vote and the euro could stay
in a $1.24-$1.27 range. A win for parties opposing the austerity
terms of Greece's bailout would leave the country on the brink
of bankruptcy and an eventual chaotic exit from the euro.
On the other hand, a win for the parties supporting reforms
and austerity could provide some relief and see the euro bounce.
"Every time we get a piece of good news the market sells
into it and looks for some bad news again," said Daragh Maher,
currency strategist at HSBC. "But ahead of the Greek elections
people will be reluctant to go too short of the euro in case we
get some good news, so it will stay quite rangy until then."
The result of Greece's election looked too close to call
between parties supporting and opposing the international
bailout and harsh austerity measures accompanying it.
As a worst-case scenario should Athens decide to leave the
euro, European officials have discussed limiting the size of
withdrawals from ATM machines, imposing border checks and
introducing euro zone capital controls.
The options market reflected the skittishness among traders
with 1-week euro/dollar implied volatility spiking to a
six-month high at 14.9 percent as quoted by ICAP,
up from 10.8 percent last Friday.
LOOKING AT ITALY
In another bearish signal to investors, peripheral bond
spreads widened over their German counterparts. Italian bonds,
especially, came under pressure as investors fretted about the
country's rising cost of borrowings in a market already nervous
about the outcome of the Greek elections.
"The euro has been following euro zone debt yields around,"
said Geoff Kendrick, currency strategist at Nomura.
"As we head into the weekend, given the market is so short
on the euro, a positive Greek election outcome could see some
profit taking. People do not want to be caught out in that move,
hence they are following bond yields around."
Spanish yields jumped 9 basis points to 6.61
percent, drawing closer to euro-era highs, while the cost of
insuring Spanish debt against default jumped 10 bps to a record
high of 605 bps. Italian 10-year bond yields rose
6 bps to 6.10 percent.
The yen fell after the International Monetary Fund said it
was moderately overvalued and there was a chance of further yen
appreciation due to Europe's debt crisis.
The euro rose 0.4 percent to 99.50 yen with
Japanese exporters placing offers around 100 yen, traders said.
The dollar inched up to 79.55 yen, hovering below the
previous day's high at 79.92 yen.
In line with other perceived riskier currencies, the
Australian dollar was last trading up 0.6 percent at US$0.9920
, having retreated from a four-week high of US$1.0010
hit on Monday.

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